catch a trader

A Fascinating PBS Frontline Documentary

catch a trader

For the past year, we have been following the story of billionaire Steven Cohen’s SAC Capital, particularly its unprecedented indictment followed by a guilty plea and a record $1.8 billion fine. This is why we were delighted to see last week’s PBS Frontline documentary “To Catch a Trader”. While it did not reveal any new information, it did a fantastic job of explaining the mechanisms through which traders at firms like SAC Capital obtain insider information, and it graphically depicted the corporate culture which fosters this behavior. Charles Gasparino of Fox Business Network summarized it perfectly:

“Listen, if you walked up to a typical Wall Street trader and you say, ‘Hey, is there insider trading at SAC Capital going on?’ after the guy falls on the floor dying of laughter, will get up and say, ‘Yes,’ OK?”

Turney Duff, a former trader at the now closed Galleon Group, gives us a more detailed picture of what transpires inside these ultra-mysterious hedge funds:

“It’s all about getting information. They call it trading stocks, but it’s really trading information. Like, that’s what we were doing. So you were constantly trying to make contacts of people who could help you make more money. So I was expected to go out two, three nights a week. You know, the tab’s always picked up. There was not a restaurant I couldn’t go to, a club I couldn’t go to, which is great for a guy in his late 20s in New York City. You know, the city was mine. It was just there for the taking and— and I took. But the purpose was for me to develop relationships and get information.”

Naturally, firms have arisen that specialize in obtaining information to give the hedge funds their “edge” on the market. They are referred to in the industry as “expert networks”.  About a year ago, we published an article detailing the incredible extent to which these firms will go to obtain information. In case you missed it, here is the recruiting advertisement that they ran:

Secret Agents Needed

Do you have an open mind, a sense of adventure and the desire to make some serious cash? We’re a group that specializes in extracting key pieces of information from business leaders by seducing them with beautiful ladies such as yourself. Each assignment pays between $5k and $20k depending on the value of the information and how long it takes to obtain it. We also reimburse for travel expenses, if any. We have immediate needs for beautiful, sophisticated ladies who will do anything it takes to find out what we need to know! Please send photos and tell us something about yourself.

Raj Rajaratnam, the head of Galleon Group who is now serving an 11-year sentence for insider trading, was notorious for using this type of “secret agent”. One of Rajaratnam’s most highly placed sources of information, Rajat Gupta, was convicted and sentenced to two years in prison, but he remains free on appeal. Gupta was on the board of directors of Goldman Sachs and he had advance information of Warren Buffett’s $5 billion investment into Goldman, which he passed on to Rajaratnam who proceeded to make a killing.

To summarize, Martin Smith and Nick Verbitsky did a masterful job of de-mystifying the world of hedge funds, especially the ones that have reported above-market returns thanks to their “edge” on the market. It is well worth an hour of your time.